An Awful Variation On The Foreclosure Tune

I am afraid that I am one of those people who have no patience for people who refuse to pay their debts. People who can't pay their debts? All the sympathy in the world, even if they accumulated those debts through a series of stupid decisions. Easy bankruptcy is a good thing precisely because it helps us sort out those sorts of situations quickly, allowing the unhappy bankruptee to get a fresh start. Yes, some of them go on to make even more stupid decisions. But most people who declare bankruptcy do so only once, which means they don't make that sort of mistake--or at least, that magnitude of mistake--again.

On the other hand, while I was mostly against the 2005 bankruptcy reform, I was happy to see that it tightened up the rules on the small minority of people who were unequivocally using bankruptcy to game the system--filing and then vacating serial Chapter 13 petitions in order to keep from being evicted or foreclosed out of houses where they'd never intended making the monthly payments. Those people were few in number, but they were really morally appalling (and before you get your progressive outrage on, they tended to be affluent and well educated, which is why they were able to game the system. They really had no redeeming excuses).

I am very sure that most people getting their houses foreclosed upon are simply folks who made a stupid decision and took on more house than they could really afford--or who got hit with a crippling job loss and didn't have quite enough of a cushion to see them through. Which is maybe why when I read about people like this, my outrage rises so hot:

Ms. Richey, the teacher, arrived in Palmdale in 1999. In 2004, she and her husband, Timothy, bought a two-story home on Caspian Drive, near Avenue O-8, with a no-down-payment loan. They took pride in the amenities they installed: a powder room with granite countertops, a backyard pool and play area, and the purple-and-turquoise fantasy playroom upstairs for their three daughters.

But the value of the house plunged to less than $200,000 in 2009. Their $430,000 mortgage, with its $3,700 monthly payment, began to look more like an unwanted burden. By May, amid troubles getting tenants for two rental properties she also owned, Ms. Richey decided the time had come to cut a deal with America's Servicing Co., a unit of Wells Fargo & Co. servicing the mortgage on the house.

After three months of wrangling, she says she finally received a modification approval. The new monthly payment: about $3,300, far more than she had hoped. A Wells Fargo spokesman confirmed the bank offered Ms. Richey a modification under the Obama administration's Making Home Affordable program, and said, "The Richeys turned down the lowest payment we could offer."

Ms. Richey and her husband had already been working on Plan B -- exploring the neighborhood's "For Rent" signs.

On one trip, they drove by the house at 3152 Club Rancho Drive. It was bigger than their house on Caspian, had a pool with three waterfalls, and boasted a cascading staircase that Ms. Richey says she could picture her daughters descending on prom night. The rent was $2,195 a month.

. . .

Ms. Richey and her family made the move to Club Rancho Drive in August, when she was already several months behind on the mortgage. With Mr. Robbins's help, she recently sold the house on Caspian Drive for $195,000, money that the bank will accept to settle the $430,000 mortgage debt. She's also considering walking away from the mortgages on her two rental properties.

Showing a visitor the personal touches in her new home, including a $1,800 dining set she bought with some of her newly available income, she notes the advantages of being a renter rather than an owner.

"You take a risk for the American dream," she says. "I don't have to worry about paying property tax, homeowners' insurance, the landscaping, cleaning the pool or any repairs."

Maybe the reporter made them sound worse than they are . . . but it sure sounds like they just decided that once the price of their property fell, they shouldn't have to pay back the money they'd borrowed.

There is a sizable school of thought that says why shouldn't they? They made a contract with the bank under known rules, and as long as they're willing to pay the penalties, why shouldn't they just walk away, the way a corporation would? Well, for one thing, companies don't always behave like this, and those who get a reputation for stiffing their suppliers run into trouble. But for another, because society doesn't really work on such clean logic. The reason we can have easy bankruptcy and a pretty robust credit market (usually) is that most people act like debts are obligations which should always be paid off if possible. I'm not saying you should live on Kraft dinner and water for twenty years to slave at an impossible mountain of debt. But I think before you walk away from three different mortgages, you should explore life options that do not include $1,800 worth of new furniture.

This 1997 article from Fortune on Memphis, then the bankruptcy capital of America, details what happens when those norms erode:

There are serious costs to being the No. 1 deadbeat, of course. It's almost impossible to cash checks in Memphis. Used-car dealers charge their wholesale cost as a down payment. And lenders are either tightening or giving up. First Enterprise Financial Group, for instance, an Illinois-based sub-prime lender, closed its Memphis operations in May.

And those norms can change, as the Wall Street Journal article points out:

Mr. Sobelman has plenty of company. In a recent study of people who owe more on their mortgages than their houses are worth, economists Luigi Guiso, Paola Sapienza and Luigi Zingales found that about four out of five believe defaulting on a mortgage is morally wrong if one can afford to pay it. But they also found that the people become 82% more likely to say they'll default if they know someone else who defaulted.

We are better off living in a culture that believes that if you say you'll do something, you'll try your level best to do it. Most of us get pretty outraged, as we should, when companies violate those norms because hey, they're not actually legally obligated to ensure that you have a computer that turns on, or a toaster that makes toast. That outrage serves a valuable function whether it is directed at people or companies. It allows us to put some level of trust in those around us.